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Here’s the entire text of the Q&A from Comcast’s (ticker: CMCSA) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Thank you, sir. Operator Instructions The first question is from Richard Greenfield from Fulcrum Global Partners. Please go ahead.

Q - Richard Greenfield

Hi, a couple of questions. When you think about your video programming deals, do they currently allow you to stream television to wireless phones, or do you have to go back and negotiate that? And then just in terms of your digital sub adds, you had 307,000 in the quarter, how many of those were the enhanced basic, and what's the related ARPU on those enhanced basic subscribers versus your existing digital subs? Thanks.

A - Brian Roberts,

Okay. Good question, John will hit number two. Let me take number one. On the video programming deals, being that we're not, we never were, in the wireless business, for the most part I don't believe our contracts would cover them. But that raises the broader question, and one of the reasons I think Sprint sought us out is our relationship with the content community and the opportunity to add value. And I think one of the things we talked about yesterday, for those that weren't at the Sprint announcement, is really the creation of a third screen, as a possibility. And you heard Dick Parsons talk about it on the Time Warner call, and you saw it with the iPod announcement with Desperate Housewives. Our view is, and really I think a lot of it can certainly also be attributed to our great success with 1 billion streams, as Steve mentioned, in ON DEMAND. The television business is changing, and just as the music business before it has changed and is changing. And we, all of us, see the opportunity to be very protective of digital rights management, to have the content community feel good and secure in what is happening to the content at all times, but to create new opportunities that will allow all the distributors and the rights holders to create new revenue and new business models for customers. And you see this, and I believe the dam is open. We're very excited by the iPod announcement, and I think you will see announcements following on. The movies that Steve talked about for ON DEMAND, and so we will go back very quickly now, and begin a conversation on how can we take snipets, maybe full-time channels, maybe custom-made content. And I'd give one last point on this, because I think it's a very interesting area, if you were to ask yourself, for $0.99 you can buy a song and download it, and for $1.99 you can download 30 seconds of a song, which would people like more? And it's kind of amazing, when you step back and think that ring tones account for $5 billion of revenue, and iTunes is 1/10th or less of that. So the consumer behavior is sometimes hard to foreguess, or predict. Secondly, the wonderful new business that that represents to the music industry, rather than just a straight cannibalization of an existing revenue, but the creation of something that a generation is in love with, such as ring tones, creates, to me, in my mind, the real promise of a video ring tone. Not the actual ring tone, obviously, but the idea of is there another set of applications that you people would pay a small premium for, or an incremental charge, or have a new advertising model, or a new business relationship that can occur on wireless devices as they evolve over the next 20 years that will enhance the relationship that we today enjoy, and if you look at what happened with ON DEMAND, when we started out, we didn't have any content, we now have 4,000 shows, lots of movies, and wonderful -- every single category and every relationship with the content company we have, they all talk about ON DEMAND. So we think this is the beginning of creating a technical platform which will quickly follow it on with a relationship with the content and distribution community.

A - John Alchin

And, Rich, with respect to the enhanced basic what we're now calling the enhanced cable product, we mentioned that included in the 284,000 digital adds in the second quarter this year, that there are about 40,000 enhanced cable adds. This quarter, however, there was essentially no change in the number of enhanced cable subscribers, as we were really focused on the network side of the digital simulcast rollout as opposed to adding any more enhanced cable customers. You will see that number increase as we get into the latter part of this year going into next year. Next question, please, operator.

Operator

The next question is from Aryeh Bourkoff from UBS.

Q - Aryeh Bourkoff

Just a few questions. First, on the financial side, could you just talk about the working capital swing, I think there may be some one-time items we can go through. I think this year in the circle it was negative 2.11 last year it was plus $3.84, so a pretty big swing year-over-year. If you could talk about that. Then a bigger picture question for Brian, can you talk about cable valuations in a historical context. Obviously we haven't seen a market like this, but could you talk about this time around, given your balance sheet strength, the Company has the ability to sort of capture some of that value, you've materially increased the buy-back in the third quarter, obviously, but what kind of things could you do to sort of unlock value in the future, especially given your flexibility, and just putting where investors are looking at cable today versus your experience historically? Thanks.

A - John Alchin

Okay. Aryeh, with respect to working capital we add one-time event in the third quarter last year, and that was the Liberty share exchange, which resulted in a cash in flow of about $547 million. So if you net that out, we would otherwise have been negative about 160, this quarter last year, as opposed to the 211 this year. And literally 50% of the negative number, about $100 million, relates to timing of interest payments. We tend to make those payments in the first and third quarter, and that has the impact on working capital.

A - Brian Roberts

Well, look, valuation is an art, not a science, and different people can disagree at any one moment in time. The Company's actions in the last several months and really last period of time here is, as our business continues to generate free cash flow and continues to grow, our first priority is to put the money back into the business, be that of advanced digital boxes or phone readiness or software relationships and innovation, and secondly, we've chosen to buy back the stock in great quantity, I think more than any other company in our sector in the last year or so, certainly in the cable and some of the media companies. But the market obviously sees forms of competition in the future because they're discounting your current cash flow at what is probably a historical low on the multiple of our cash flow to our market value. That's the pure math. And it is -- I believe that the Company's responsibility is obviously to try to take advantage of that opportunity if it's there and finding financial plays and buying stocks and buying the Susquehanna and being able to take advantage of our synergy and find opportunities to create value if we're right about our future, and secondly, I think to continue to just remain differentiated, not be commoditized, point out that the sky is not falling, the grass is not greener, we are not going to allow any, if we can avoid it, any innovation to pass this company by. We're not just sitting there going to stand static. And yesterday's announcement I think is great proof of that. The ON DEMAND creation is proof of that. I think the success of phone around the industry is proof of that. And I think it will continue that way. This is an entrepreneurial industry. Can't reflect what will be a catalyst event, but I think it's amazing to me that we continue to hear about new technologies that are going to change everything and not really there, and yet this industry continues to march ahead. Steve do you want to add to that? It's a tough question to answer.

A - Steve Burke

To sort of build on that point, today we are marketing upto 12 million -- our phone product to 12 million homes. And I don't think any of the RBOCs are actively marketing any video anywhere in our footprint. The effect of RBOC FIOS type services has been really de minimus and so if you want look out a year or two, almost no matter how you paint a picture of the world, we're going to be marketing phone to many, many more people and actively expanding that business, and, it remains to be seen what kind of impact the RBOCs are going have on our video business at all.

A - Brian Roberts

So if you look at satellite a few years, their platform may have had more features. I don't think there's any question in most people's mind that cable has a superior technical platform. Now we're talking about theoreticals with phone, perhaps we're happening slower and with less initial impact than some might have thought, and next thing people say is, okay, what about the Internet? Again, just for a point of view, I believe video over the Internet is a great opportunity for this company. And we are going to do it again, we have our FAN had 30 million video downloads last month. We do like a million a day. We think that the faster your broadband, the more video works well, and that, frankly, again, I don't see the content companies wanting to just completely unbundle all of the cable experience to change the business model that is going to benefit so quickly and put their content into an unlicensed model. So there is a theft unlicensed world that we all should worry about, which is why we're so strongly supportive of content protection, and digital rights management, but I actually think it goes back to, and I won't do it again, the video ring tone. I think you will be looking for new models through video on the net. Some would call it the lean forward experience, versus television, lean back. Everybody we talk to is pursuing ways to, when you're sitting at a computer and you have different search capabilities, and I think television is going to continue to be different than PCs, and that broadband growth in this country can grow and continue to grow from here because of video, Comcast is going to be a big winner and we're going to try to make that happen. So again, some see the glass as half full. We continue to be quite optimistic.

A - John Alchin

Next question, operator.

Operator

The next question, from Jessica Reif Cohen from Merrill Lynch. Please go ahead.

Q - Jessica Reif Cohen

Thank you. Two questions. One, John, could you address the increasing CapEx for this year, how much of that is voice related and how much it relates to the set-top boxes since you did not change your RGU outlook, and as part of that if you could just comment on the '06 outlook for CapEx. Second, maybe for Brian, could you comment on your interest, or reported interest, in AOL, along with Google, particularly in light of what looks to us to be an incredibly underleveraged balance sheet?

A - John Alchin

Jessica, it's too early to sort of be too specific about next year in terms of CapEx. We'll do that when we put out our fourth quarter numbers. But order of magnitude, you're probably looking at well over half of the increase related to the number of advanced set-top boxes that are going out there, and with the remainder just having to do with getting readiness of the digital voice product, and as Steve said, we really have a plant that's now ready in front of about 20 million homes, that's more than we expected to be, even though we're not marketing in front of those homes, at year end we expect to be marketing in front of about 15 million of those homes.

A - Brian Roberts

Yes, I mean, to move the new RGU model, Jessica, when you're talking about millions of units, at some of these advanced boxes, at over $400 a box, just a slight shift in the take rate, again, I believe this is a high-class, welcomed situation which is to be able to have customers want our services, and we're kind of -- we're at the moment in time, a lot of the deals the last six months have been about trying to get multiple set-top box manufacturers to drive down the cost of these advanced boxes, and we have agreements in place that will kick in hopefully in the second part of next year that will begin to significantly bring down the cost of these boxes so that we can continue to sell even more and more units. But the more customers take these products, as Steve said, and take a bundle of products, the more successful we think we'll be in the years ahead, because these are recurring revenue, and you're putting the up-front capital in today, obviously we'd like that capital to be lower, and we're trying to find that balance. To the question, we're not going to speculate here on any potential AOL or any other situation such as that. We'd generally comment that the Internet is a growing area, advertising on the Internet appears to be a great value, if you get the right mix in customers and directed search, and we have more broadband connections than anybody in America. And broadband searches account for well north of, I think, 80% of Google's searches. So it's not inconceivable that companies seek us out to say, are there ways that we could work with Comcast. I think we're in a great position. We don't feel compelled to add anything, as you know, we talk and listen to every idea out there. And then to your comment about a significantly underleveraged balance sheet, everybody has different views of those words, but we still do have something like 22 or $23 billion of debt. These are large numbers. We are conservative, but we did take most of the -- as John said, or all the free cash flow and buy back our stock. So we, again, did not have to spend a lot of money on wireless. That was another element of the transaction that I think, we did say yesterday that among all the things we looked at was whether you want to build your own network or buy a network or partner with somebody, and for the right reasons, we had the flexibility, if we wanted to go and build or buy, but we chose willingly and happily to partner with someone who is expert at a business who is equally motivated to differentiate their product using our assets, and we're equally motivated to differentiate our products using their assets. And so again I think we're going to look for creative ways to successfully deploy our capital, but first and foremost is to give our customers value as we did this quarter.

A - John Alchin

Thanks, Jessica. Next question, please, operator.

Operator

The next question is from Craig Moffett from Sanford Bernstein.

Q - Craig Moffett

Two questions if I could. The first is, just to expand on the last discussion, can you talk about what the advertising potential might be for your broadband portal, and in the absence of any M&A type of transactions to monetize that advertising potential, what you might do just as a normal course of business to ensure that you're getting sufficient advertising, and then a follow-up if I could.

A - Brian Roberts

The portal right now gets what I would call a very insignificant amount of advertising revenue, and we did that by design when we first launched the portal. We said, let's try to keep this an environment that had almost no advertising. We have a very small strip down the side, and of course we have a relationship with Google, so we get some derivative search advertising but we've noticed that consumers, particularly as it relates to streaming video on the Internet, are very tolerant of having ads at the head of a video stream, whether it's the ESPN 360 product, or MTVs broadband product, people are used to seeing a 15 minute clip, and we think that's a huge opportunity given the fact that the Company has 30 million broadband clips a month, and each one of those could be an opportunity to put an ad, and with the billion-plus VOD streams, we think there's an opportunity there as well. We're currently not doing either. We have a plan that we're working on to be able to do both of those streams in the next, say, six months or so and go out and start to sell those. Not on a dynamic basis. In other words, not inserting ads dynamically based on the person at the other end. That's going to take a little bit longer. But just putting ads at the front of those streams and we think that's a big potential. As to how that actually gets quantified and when that rolls through the P&L, we don't know, but it's a lot of eyeballs that currently we're not advertising to at ? One of the lessons from Google's success has been the power of aggregation, not just with their own network, but with working with others. And so consistent with the Sprint announcement, again, we're going to do that on a technology basis, the same thing can be said are there ways to aggregate this industry's broadband eyeballs and its future eyeballs, and as those eyeballs increasingly are exposed to video opportunities in sort of the next-generation of the Internet, there's a lot of discussion going on about how best to take advantage of that, and you're playing offense here, and it's a neat opportunity.

Q - Craig Moffett

Thank you, Brian. One follow-up question. As you roll out your advanced set-top boxes, you presumably are getting a bunch of DCT 2500s, or standard definition digital set-top boxes back into inventory. Can you just update us on where that inventory stands, and is that a strategic opportunity to accelerate the all-digital transition, if you will, to redeploy those boxes out into the field?

A - Brian Roberts

Well, you're exactly right, we are getting a lot of DCT 2500s back. The first thing we try to do is keep them in the home as an additional outlet, so if a person has one or two boxes in their home you put a DVR box in, then you move the DCT 2500. Second thing we do is take it out and then reuse it. I think it's fair to say we haven't bought any or very few DCT 2500s for a long time. We're essentially now buying DCT 700s, which are the all-digital box, and then the DVRs. Just a point on the DVRs, what has happened to us this year, is that the demand for DVRs and hi-def boxes has far exceeded what we thought was going to be the case, and some of it is due to the fact that DirecTV is advertising DVRs, and that has a derivative impact on our business. Some of it is due to the fact that hi-def adoption is higher than we thought. We literally are being pulled by that demand to buying more boxes than we had planned. Now, that's a good thing, because when we do an advanced set-top box, let's say it's $400, we get $10 a month in revenue. So there's a nice return on that, and the customer is happy but it does have an impact on capital.

Q - Craig Moffett

Thank you.

A - John Alchin

Thanks, Craig. Next question, please, operator.

Operator

The next question is from Ray Katz from Bear Stearns. Please go ahead.

Q - Ray Katz

Yes, good morning. Question first for Brian, and then for Steve. Brian, regarding the wireless JV, you stressed the innovations that will be coming out of that more than anything else. We seem to have precious little detail though on the organization of that JV who will be making decisions on prioritization of research projects, on direction of budgeted funds to fund those research projects, any kind of Board, CEO, management, et cetera, almost the impression it's a virtual organization. Could you put some meat on the bones for us, and for Steve, second question, basic subs, you said about half of the subs, basic subs that you lost this quarter were lifeline subs, so I'm just wondering, it strikes me as a little odd that lifeline subs are dropping. Where are they going? What are the dynamics behind the ones that are weren't lifeline that you lost in the lifeline as well?

A - Brian Roberts

Okay. I'll take the wireless JV part. It is not a virtual organization at all. We'll have more announcements as we organize and take shape on that. There's been a lot of work done for a long time by Sprint. They've been experimenting with the cell phone part of it. I don't want to minimize the quadruple play. Let's not allow that to happen. The marketing element of this alone is very interesting. There is a bilateral relationship between Sprint and each MSO, how aggressively you want to do that, it can be done MSO city by city, different offers. Very elegant structure, it's 50/50, so you are going to have to agree on that. We've agreed on how we would divide various discounts that if you take a four product bundle, a three product bundle, a two-product bundle, et cetera. The product road map for the next couple of years has actually been discussed in great detail. There's a number of products that Sprint has been working on, a couple that I've mentioned already on this call. There will be full-time people devoted to this, and we're -- as with everything, first you do the deal, then you start announcing the next phase of it, but I think we said yesterday there will be products out in '06 that will be available off of Sprint's platform. The more important question I think is do you think it's governable and workable. And I guess what I'm trying to say is, having been in many ventures, maybe everyone starts out with the same optimism, but sometimes you just look at the structure and say, gosh this is awfully complicated. That's not the case in this structure. There is a quite unified cable industry of what we want. We have very workable governance between the cable companies, I believe. Then as to Sprint's agenda, again, it's to how best and what do consumers want with this platform and whether it's communication services or television services or some of both, and I think that this is one of those, you build the platform, then there will be lots of people with applications. Yesterday I happened to be on a panel with Ed Zander, the CEO of Motorola, and the timing was quite interesting, people were asking Motorola about this, and his answer to a couple questions was, they have a different vision of exactly what the television part of it would be, and, Ed was saying, you know, you could take some of the shows off your DVR, which wouldn't take the whole show, just take the last inning of an exciting game, or you would automatically take letterman's top ten. Or different things that will be different ideas that people will have, but the wireless business, without a doubt, it was critical to offer our customers this possibility to migrate their experiences outside of the home. And I think we've accomplished that. In terms of the basic subs, we do, in a typical quarter, we do 1.5 or even 2 million connects and disconnects. So when you think of a cable company, you really need to think of, because of moves and everything else, lots of people coming in and out of the business and so it's very difficult to precisely tie it down to, okay, here are 23,000 people out of 1.5 million coming in and 1.5 million going out and a total base of 21 million. And the real driver, I think, is trying to manage your promotions so that you're not overpromoting, and overdiscounting, and so that you're trying to concentrate on moving people up to digital and growing your ARPU as opposed to deteriorating your ARPU, but I would guess that a lot of those people found a cheaper deal someplace else and left the fold.

A - John Alchin

Next question, please, operator.

Operator

The next question is from Kathy Styponias from Prudential Equity. Please go ahead.

Q - Kathy Styponias

Hi. Thanks very much. Two questions as well. With respect to the CapEx increase, it sounds like about 100 million of the increase in CapEx is due to further voice deployment. I guess my question is, what is it that's coming in higher than you had anticipated, especially in light of the fact that the subs that you're adding seem to be somewhat slow, and the second question I have is regarding the Adelphia deal, there seem to be some rumblings out of Washington that there might be conditional approvals put upon this deal, specifically things like either a family tier or network neutrality conditions, and I was wondering if there were any deal breakers with respect to certain conditions. Thanks.

A - Steve Burke

In terms of the phone deployment, it's been a little bit more expensive, not in terms of the per-unit economics, but in terms of getting the plant ready. And when I say more expensive, I think it's modestly more expensive. We also have done more aggregate footprint, more certified homes when we talk about the gross number, than we had initially planned.

A - Brian Roberts

I don't think we can speculate on any conditions. I think it's premature. We certainly hope to get this deal through, and believe that we will.

A - John Alchin

Next question, please, operator. I think we should make this the last question. We're almost at an hour.

Operator

The last question is from Douglas Shapiro from Banc of America Securities. Please go ahead.

Q - Douglas Shapiro

Thanks. Sorry to beat a dead horse on this CapEx question, but just to drill down a little bit on the advanced converter spending, it looks like the deployments are only up a little bit modestly over the second quarter. So is it that the surprise is that you thought the demand was going to moderate or that you thought the ASPs were going to come down, or is it just that you expect there to be substantial demand in the fourth quarter that you need to prepare for? The second thing, for Steve, is that I think you briefly alluded to this idea that you're seeing some beneficial impact from VoIP, or CDV, I should say, on basic and data in some of your older CDV markets. So just wondering if you could add a little bit of color and specificity to that.

A - Brian Roberts

Let me do them in reverse order. I think the initial testing in terms of the three-product bundle, really confirms the kind of sort of broader full-market rollout evidence from Time Warner cable and Cablevision. We've done this in very small sample sizes, but I think we're getting more and more convinced that a big part of our future is going to be managing the bundle in a very strategic way. As it relates to the digital set, the advanced set-top boxes, during the quarter, virtually 100% of our digital adds were advanced set-top box. The demand started to take off in the beginning of the year, in the second quarter, and we kept saying was there a way that we can gate this demand, because it's just been so high, then at a certain point we said we shouldn't gate it. If we're getting the kind of return on, 25, 30% return on these boxes, let's keep rolling them out, a person who has a DVR that's loaded up with their programs is more likely to be happy with our service and everything else and stay with us than if not. So at a certain point during the year we said, okay, we're starting to run these overall variances, but it's the right business thing to do, and spending more capital that's going to get a return in the future is appropriate. I just want to make sure that that point, it's an excellent point, I'm not sure it came through that clearly on this call. If you have an existing digital home and they then take a advanced box, it's not a net new add.

A - John Alchin

Either as a digital customer or as an RGU.

A - Brian Roberts

We just are changing the consumer experience and it's costing some money. We think it's great. People love it. It changes their television, and we're going to make those boxes cheap in the future. Long run, I think many, many percentage of Americans are going to have DVR capability in their homes.

A - John Alchin

Thank you all.

Operator

We have no further time for questions. There will be a replay immediately following today's conference call. It will run through tomorrow night at midnight central time. The dial in number is 630-652-3000, and the passcode is 12825827. Once again, the number for the replay is 630-652-3000, and the passcode is 12825827. A recording of the conference call will also be available on the Company's website beginning at 12:30 p.m. today. This concludes today's teleconference. Thank you for participating. You may all disconnect.

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